Thorsten L. Beck, Leora F. Klapper, Juan Carlos Mendoza World Bank, Washington D.C. The Typology of Partial Credit Guarantee Funds around the World

I. Summary   This paper presents data from a survey of 76 partial credit guarantee schemes across 46 developed and developing countries   We discuss different organizational features of credit guarantee schemes and risk management devices and their variation across countries   We focus on the respective role of government and private sector and different pricing and risk reduction tools and how they are correlated across countries   We find that government has an important role to play in funding and management, but less so in risk assessment and recovery   Schemes with more government involvement are less likely to use risk-reducing devices and have higher loan default rates 1

II. Survey Design   General questions on the characteristics of the fund: - General characteristics - Ownership - Type   Detailed information on operational characteristics: - Eligibility - Pricing structures - Risk management   “Output” measures of PCG activities: - Number of loans guaranteed - Average value of loans guaranteed - Number of loan defaults 2

III. Summary Statistics Summary Statistics, Medians 3

IV.1. Results - Corporate Structure of Schemes   Mutual Guarantee Associations (or Societies): collectives of independent businesses and/or organizations that grant collective guarantees to loans issued to their members; may receive government funding (i.e. Italy)   Publicly Operated National Schemes: government initiatives at the local, regional, or national level; generally established as part of a public policy objective (e.g. promoting SMEs); although publicly funded, these might be managed by private groups (i.e. Korea) 4

IV.2. Results - Responsibilities   Governments have an important role in funding, but a much more limited role in management, risk assessment and recovery - -Even funds with government management and credit risk assessment responsibilities are significantly more likely to use private parties to recover loan losses   The Private Sector shares in funding with governments, and is dominant in management, risk assessment and recovery - Financial institutions generating the loans being guaranteed are mostly responsible for credit risk assessment and recovery of defaulting loans 5

IV.3. Results – Risk Management I   Firms that use a loan basis are significantly more likely to have a guarantee limit   Firms that use a portfolio approach are significantly more likely to receive government funding – and use the private sector for credit risk assessment 6

IV.3. Results – Risk Management II   Risk-based pricing does not vary significantly with the level of economic and financial development   Schemes that are restricted to SMEs are more likely to have elements in place that base pricing and payouts on risk 7

IV.3. Results – Risk Management III   Schemes where loan repayments lower the cost of future loans have significantly higher guarantee limits and later payouts   Schemes that payout at the time of default are less likely to have no risk management program, whereas the reverse is true for PCGs that payout later   It appears that banks that take on more ex-post risk and recovery costs, correct for this by charging risk based fees   Schemes with government responsibility for credit risk and recovery are significantly older and more likely to guarantee loan portfolios, payout after the bank initiates recovery, and have no risk management program 8

IV.4. Results – Total Loans and Defaults Rates 9

IV.5. Results – Findings   Default rates are higher in older schemes   There is no significant variation in default rates between countries at different levels of economic and financial development   Schemes that are more restrictive in their eligibility criteria do not suffer from higher loss rates   There is a strong correlation of default with the government’s role in partial credit guarantee schemes   While government funding and management is not correlated with the default ratio, government involvement in credit risk assessment and recovery is associated with higher default 10

V. Conclusions   We find an important role of government in the funding and management of PCG funds, but less so in risk assessment and recovery, roles that are mostly confined to the private sector   There is a variety of specialization among PCG funds   Similarly, pricing, risk assessment and risk management strategies differ across the different schemes   There is a surprising dearth of schemes that reduce risk through risk-adjusted and performance based pricing and payout only after the lender starts legal action against a defaulting borrower   The role of government in risk assessment and recovery, as observed in a few PCG funds, is associated with higher loan default rates 11

VI. Future Work   The effect of different characteristics of PCG schemes on banks’ risk-taking decisions   The effect that credit guarantee schemes have on access to credit, entrepreneurship and job creation   A proper cost-benefit analysis of PCG funds compared to other SME government interventions   This research require time-series, loan- and borrower- level data, preferably over changes in specific characteristics of guarantee schemes 11